As a byproduct, the options board has gotten rather skewed. Cheapie calls always get the biggest demand in VIX-land, and it stood to reason that the more demand overall for VIX calls, the more skewed the curve would get.

Volatility of volatility is a very confusing topic. The "VIX of VIX" (VVIX - 90.74) indexes just that. It applies VIX methodology to options on … the VIX. And it really hasn’t budged much despite the VIX call interest. It's at roughly 90 as I type, right smack in the middle of the 85-95 range that has persisted since the end of July.

All that really says, though, is that nearer-money VIX options have not fluctuated much in volatility. It speaks relatively little about out-of-the-money (OTM) VIX options, which have done well in volatility terms. That’s the part of the curve where both portfolio insurers and speculators play.

How do we know that?

The top call open interest on the November board belongs to the November 25 strike, with a whopping 264,790 outstanding. Right now, those calls are $7 out of the November money and $9.50 out of the “cash” VIX money.

The second most popular strike on the November open interest bandwagon is the November 35 calls, with 181,392 contracts outstanding. November VIX would have to virtually double to get these pups in the money, not to mention the move needed in the VIX itself.

For perspective, November 18 calls carry 89,917 open interest, while November 20 calls check in at 128,387.Those two, along with November 23 calls (about 90,000 in open interest) have the most open interest among strikes below 25.

And buyers pay actual dollars for these OTM VIX calls. The Nov 25s go for about $0.75, while the Nov 35s go for 22.5 cents. In implied-volatility terms, that’s something like 120 and 135, respectively (I can’t get exact readings as my trading system uses VIX cash as the basis and not VIX futures -- why no system can correct for that is a perpetual mystery).

It's really not about implied vol. of vol. though -- it's a dollar amount that specs/hedgers are willing to pay for a potential VIX-plosion. And it's important to note that owners don’t need VIX to actually get up and over the strikes to make them worthwhile. The calls will explode into a sudden VIX lift.

The big skew does provide an opportunity to fade for those daring to bet against a VIX-plosion. In his daily report on the VIX, Jamie Tyrrell highlighted an interesting play that went up Thursday.

The order initiator bought 10,000 November 23 calls and shorted 20,000 November 28 calls, taking in a net credit of about $0.07 for the spread. If nothing happens, he pockets this premium. If the VIX rallies into the low or mid-20s over the course of the next 5.5 weeks, he crushes them. If it expires anywhere under 33 in November, he still wins.

The downside? Well, he’s exposed to a very near-term move into the 20s, and a longer-term move into the 30s. And of course, it's wildly open ended.

Time will tell, but I like his odds.

Disclaimer: The views represented on this blog are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.